The nation’s second largest public pension fund, reacting to a mass school shooting in Connecticut last month, is taking a new look at the “social” impact of its $150 billion investment portfolio.
The California State Teachers Retirement System found that it owned stock, apparently in violation of its own policy, in the maker of a semi-automatic rifle, banned in California, that was used to kill 20 first-graders and six adults in an elementary school.
Teachers on the CalSTRS board seemed emotionally moved yesterday before a unanimous vote that may result in the sale of $2.9 million worth of stock in Sturm Ruger and Smith & Wesson, makers of some guns and large ammo clips banned in California.
Through its holdings in a private equity firm, Cerberus, the pension fund also owns stock valued at $8.8 million in the Freedom Group, maker of the Bushmaster rifle used by a lone gunman in the massacre at Sandy Hook Elementary in Newtown, Conn.
Dana Dillon, board chair, said she realizes an inquiry from CalSTRS may not be the “single factor” prompting Cerberus to announce that it would sell its shares in Freedom Group, owner of Remington, Marlin, H&R and other brands.
Her voice breaking, Dillon asked the staff: “When you have conversations, did you express our gratitude for moving quickly?” She was told Cerberus had been thanked in the media and directly in conversations.
State Treasurer Bill Lockyer, a member of the CalSTRS and California Public Employees Retirement System boards, has asked both pension funds to divest holdings in firms making firearms banned in California.
Like many pension funds in the U.S. and other nations, the two big California funds try to follow investment guidelines that have become known as “ESG,” an abbreviation for “environmental, social and governance.”
Some coordination among the pension funds is attempted through organizations such as the International Corporate Governance Network, the Council of Institutional Investors and the United Nations Principles for Responsible Investment.
Following ESG guidelines might seem to be a potential conflict with the “fiduciary” or legal obligation of pension boards to protect member benefits, presumably by trying to maximize investment returns.
But for long-term international investors, CalSTRS and others argue that investment returns are protected by safeguarding the environment, avoiding abuses of human health and rights, and pushing for good corporate governance.
“As a significant investor with a very long-term investment horizon and expected life, the success of CalSTRS is linked to global economic growth and prosperity,” says a CalSTRS policy on ESG investing. “Actions and activities that detract from the likelihood and potential of global growth are not in the long-term interests of the fund.”
Critics suggest that an ESG investment policy is a smokescreen for labor-friendly pension boards that want to use their investment clout to pursue an activist liberal political agenda. (See “The Next Catastrophe,” Reason magazine February 2009).
CalSTRS and CalPERS played a leading role in pushing for the Dodd-Frank post-crisis financial reform in 2010, opposed by business groups. The two California pension funds also pushed for settlement of a janitor strike last year in Houston, Tex.
At the request of Lockyer, the two pension funds adopted a policy in 2011 of urging corporate boards to disclose political campaign contributions, a response to a court decision that allows unlimited contributions without disclosure.
Legislators have used pension fund investments for political purposes, calling for divestment in firms doing business with troubled nations such as apartheid South Africa, Sudan and Iran and putting Northern Ireland on a watch list.
A consulting firm said CalSTRS lost $600 million to $700 million as South African holdings were sold and replaced and investment opportunities lost. CalPERS is estimated to have lost $1.86 billion by 2006 from South African divestment.
CalSTRS removed tobacco from its passively managed index funds in 2002 and dropped all tobacco-related securities by Jan. 1, 2010. Since then its portfolio has yielded about $570 million less than a similar portfolio with tobacco, a report said last month.
A written policy has guided CalSTRS investments on ESG issues since 1978. But a list of 21 “risk factors” on “geopolitical and social” issues was not adopted until 2008 as CalSTRS worked on Sudan divestment.
Chris Ailman, CalSTRS chief investment officer, told the board yesterday the focus in 2008 was on human rights as investments in emerging markets increased and on risk and liquidity as the financial crisis erupted.
He said the new risk factors were not applied retroactively to existing investments. So the Cerberus investments in the Freedom Group, which were made before 2008, went undetected.
Ailman said a review made after the school shootings last month found that Sturm Ruger and Smith & Wesson are violating two of the 21 risk factors: “human health” and “human rights,” stated as broad principles not specific rules.
The divestment of firms that make banned-in-California assault rifles, “Saturday-night” special handguns and high-capacity ammunition clips is expected to begin with “constructive engagement” of the manufacturers.
If the firms do not comply, the CalSTRS board will be informed. Then the steps followed to ensure “fiduciary” responsibility may lead to an order to sell the stock of the gun makers.
Board member Sharon Hendricks said the CalSTRS board lacked information about the holdings of private equity firms, which are expected to provide above-market returns for pension funds.
“We invest in companies, and they buy companies,” said Hendricks. “We are kind of three or four touches away from them, and I get concerned about what’s happening in that company.”
Pension funds use their shareholder clout to monitor executive pay, board of directors composition and other actions by publicly traded companies. But it’s not clear that private equity firms get the same kind of scrutiny.
The private equity firm formerly run by the Republican presidential candidate last year, Mitt Romney, was accused by his opponents of “vulture” capitalism, profiting through layoffs and sending jobs overseas.
Board member Harry Keiley, the investment committee chair, told Hendricks the work plan for the year could include a “deeper dive” into the portfolio, probably in closed-door sessions for the more sensitive holdings.
Ailman said the staff has already begun re-evaluating the portfolio and has identified a list of additional “social” risks that should be considered as investment decisions are made.
“We say it time and again to managers,” said Ailman. “The 21 risk factors are not there just to be put on the wall. They are there to be lived. They are principles, and we are going to hold them accountable.”
Ed’s Note: Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at http://calpensions.com/